Banking is essential, but what about banks?

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Technology intersects with financial services (FS) in multiple ways and is shaping tomorrow’s financial landscape. A significant change has occurred in recent years that we could summarize in one risky sentence: Facing challenges on multiple fronts, Open Banking may soon be leapfrogged by open experience, or Open X.

How did we draw this conclusion? Various large-scale transformational paradigms:

  • Challenger banks are beginning to scale, expanding across multiple markets and reaching their first million customers. Some are even starting to consider themselves banks.
  • BigTechs are accelerating their involvement in the financial sector … Have you seen the latest Apple credit card?
  • Regulators are enabling market access for innovative solutions more and more while safeguarding stability and trust through stringent bank controls.
  • Banks are poised to become multi-channel and multi-party platforms, acting as the consumer’s central pillar of trust and turning regulatory burdens into a unique competitive advantage.

These megatrends portend major transformational journeys for banks that have built reputations on advisory services because of their natural positions as change agents able to aggregate, assess, and help shape the future of financial services.

Operation Open X

Spearheaded by regulations such as PSD2, open banking ushered in a new era of data sharing and distributed financial services within an environment in which traditional banks had held a comfortable monopoly. These days consumers are happy to share their personal data and switch to new services as long as their experience is enhanced.

Enter Open Experience or Open X. As banks trudge toward more open interaction models, the market moves faster and creates a fully accessible experience. As a consequence, traditional banks are slowly moving from being at the core of the consumer relationship to finding themselves as enablers for the ecosystem.

Consumers are speaking their minds, and they want Open X relationships. Banks must adapt to the new normal – an ultra-personalized, ultra-service-oriented way of interacting with customers.

So, to stay in the game, successful banks will embrace new roles, following a seemingly simple three-step formula: technology, people, and innovation.

To remain relevant, banks must organize their technology and systems to better interact with new ecosystems. APIs and cloud are the master keys to staying in the game – APIs to plug in and unplug from services/products, and the cloud to transform core systems.

The best and most critical assets for banks may be people. And those banks that take a page from the book of startups to test a lot, learn fast, fail fast, and start again must encourage their people to embrace a risk-taking operational culture while remaining diligent from a corporate governance perspective.

The time has come to commercialize innovation. Banking models need to move from an “open innovation” mindset, where creative change is about POC and visibility, to an “applied innovation” approach through which new solutions – introduced through collaborative FinTech/incumbent partnerships – are quickly deployed at scale and offered to all customer bases.

Banks + startups/BigTechs = ?

Challenger banks and BigTechs are now competing with banks. The race is open, and the jury is out, but let’s face it …

  • Through a customer-focused approach and segment-specific offerings, challenger banks, or FinTechs, are sprouting up throughout the financial landscape.
  • Banks are holding the fort and, in a bid to protect their market leadership, are embracing technology, by including startups into their new customer experiences.
  • BigTechs come armed with deep pockets and big ambitions. They also have reliable ammunition, born with customer centricity at their core, coupled with a wealth of data. They are ideally positioned to be at the heart of the new, upcoming Open X business models.

Within their traditional model, established banks may resist for a while, but what if they take aim at BigTechs’ Achilles heel (trust and regulatory compliance) and use it to their advantage?

BigTechs like to move fast, unencumbered by liquidity requirements and other compliance issues. Meanwhile, deft compliance navigation is at the core of what banks do. Not to mention that banks continue to enjoy high levels of trust from both the public and regulators. So, maybe winning banks will be those that focus on trust and regulatory compliance to remain at the core of the financial ecosystem while accepting roles other than ecosystem orchestrator. Welcome Open X!

Victory in the regulatory colosseum – brains over brawn

Regulators are ramping up efforts to rejuvenate the financial services landscape so that consumers take center stage. To support a learn-fast mindset, regulators are setting up public sandbox environments to offer safe places for collaboration and innovation.

Regulators are also shaping the market through the inclusion of new players by giving them financial licenses and opening the use of data, through PSD2, while keeping a tight grip on reporting, transparency, and many other regulatory frameworks (GDPR, AML, etc.). While regulatory pressure may be a burden for banks, it offers fertile ground to hold the fort in the regulatory arena and provide these services … for a fee. Banks have a unique opportunity here to reinvent their business model … while doing the same.

Banks: The financial ecosystem’s petri dish?

Open Experience, BigTech involvement, agile FinTechs, and regulatory requirements all seem to be closing in around traditional banks. However, what if banks seized the opportunity and became the switchboard for all?

Each player in the ecosystem (banks, startups, BigTechs) will have to strategically choose the role they want to play, as not all can become a platform. BigTechs have the means to challenge any bank that aims to be at the center of the platform – but may not have the appetite to deal with regulatory challenges associated with it. FinTechs are too segment-specific to pose as an ecosystem platform. So what about banks? Why not provide a transparent, multi-channel engagement model with seamless payments and transfers from any physical or digital engagement node, interoperable systems across all needs no matter whether the consumer is looking for a mortgage, an investment, or simply paying for their groceries with a fingerprint. They all land in the same place – happy.

Who’s piloting the plane?

However, to achieve all the above, current infrastructures and mindsets need a serious shakeup. The risk is daunting, and uncertainties lie ahead. Consultants such as Capgemini have a role to play as strategic advisors – to help players think through planning, implement roll-out tactics, and maintain business operations throughout the process.

Capgemini can help clients to think through systemic change and the day-to-day operation of transformational services. When it comes to applied innovation versus open innovation, Capgemini focuses on orchestrating effective collaboration between financial services players and ScaleUps, identifying specific business problems to be solved through effective partnerships and qualifying ScaleUps most prepared to collaborate.[1]

Market players must consider where they will meet this change – in denial, in passive adjustment, or head on – actively moving forward in a rapidly changing world with a bright financial services future.

The race is open, and the jury is out. Welcome Open X!

To learn more, feel free to get in touch with me on social media.

[1] A ScaleUp is a growing tech firm that has raised more than US$1 million, has retained full-time executive management, and has generated significant business revenue.

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